A Mutual Fund Master, Too Worried to Rest

By JEFF SOMMER

Published: August 12, 2012

mutual fund company founded by John C. Bogle, has become a colossus. Its index funds -- once derided for not even trying to beat the market -- are now the industry standard.And after at least six heart attacks and one heart transplant, Mr. Bogle has managed to witness this triumph. ''It's all a kind of a miracle,'' he says in a booming baritone. ''It's really nice that I'm able to see this happen in my own lifetime.''">

CORRECTION APPENDED

VANGUARD, the penny-pinching mutual fund company founded by John C. Bogle, has become a colossus. Its index funds -- once derided for not even trying to beat the market -- are now the industry standard.And after at least six heart attacks and one heart transplant, Mr. Bogle has managed to witness this triumph. ''It's all a kind of a miracle,'' he says in a booming baritone. ''It's really nice that I'm able to see this happen in my own lifetime.''

With this kind of medical history, any other man of 83 might simply enjoy his success. But not John Bogle. He is still on a mission, as outspoken as ever and nearly as vigorous -- thanks, he says, to the heart of a younger man. He's not done yet.

''It's urgent that people wake up,'' he says. Why? This is the worst time for investors that he has ever seen -- and after more than 60 years in the business, that's saying a lot.

Start with the economy, the ultimate source of long-term stock market returns. ''The economy has clouds hovering over it,'' Mr. Bogle says. ''And the financial system has been damaged. The risk of a black-swan event -- of something unlikely but apocalyptic -- is small, but it's real.''

Even so, he says, long-term investors must hold stocks, because risky as the market may be, it is still likely to produce better returns than the alternatives.

''Wise investors won't try to outsmart the market,'' he says. ''They'll buy index funds for the long term, and they'll diversify.

''But diversify into what? They need alternatives, bonds, for the most part. What's so frightening right now is that the alternatives to equities are so poor.''

In the financial crises of the last several years, he says, investors have flocked to seemingly safe government bonds, driving up prices and driving down yields. The Federal Reserve and other central banks have been pushing down interest rates, too.

But low yields today predict low returns later, he says, and ''the outlook for bonds over the next decade is really terrible.''

Dark as this outlook may be, he says, people need to ''stay the course'' if they are to have hope of buying homes or putting children through college or retiring in comfort.

He is still preaching the gospel of long-term, low-cost investing. ''My ideas are very simple,'' he says: ''In investing, you get what you don't pay for. Costs matter. So intelligent investors will use low-cost index funds to build a diversified portfolio of stocks and bonds, and they will stay the course. And they won't be foolish enough to think that they can consistently outsmart the market.''

Still, because the market and the economy are deeply troubled, it's time for action on many fronts, he says: ''We've really got no choice. We've got to fix this system. All of us, as individuals, need to do it.''

That's the message of his latest and 11th book, ''The Clash of the Cultures: Investment vs. Speculation'' (Wiley & Sons, $29.95). It offers a scathing critique of the financial services industry and updated guidance for investors. ''A culture of short-term speculation has run rampant,'' he writes, ''superseding the culture of long-term investment that was dominant earlier in the post-World War II era.''

Too much money is aimed at short-term speculation -- the seeking of quick profit with little concern for the future. The financial system has been wounded by a flood of so-called innovations that merely promote hyper-rapid trading, market timing and shortsighted corporate maneuvering. Individual investors are being shortchanged, he writes.

Corporate money is flooding into political campaigns. The American retirement system faces a train wreck. America's fundamental values are threatened. Mr. Bogle remains a dyed-in-the-wool capitalist but says the system has ''gotten out of balance,'' threatening our entire society. ''You can always count on Americans to do the right thing -- after they've tried everything else,'' he says, quoting Winston Churchill. Now, he says, it's time to try something else.

Those clients -- the ordinary people to whom he has always appealed -- need to protect themselves from peril, he says: ''In an ideal world, Adam Smith-like, individuals would recognize what they need to do in their own self-interest, and they will make changes happen and look after themselves.''

MR. BOGLE sometimes disagrees with current Vanguard management, but he remains proud of the company he created. Index funds are ever more popular, and Vanguard is gushing money, torrents of it. Thanks largely to its various index funds, Vanguard, which is based near Valley Forge, Pa., pulled in a net $87.7 billion in cash this year through June, excluding money market funds. That's nearly 40 percent of the cash flow of the entire mutual fund industry.

This article has been revised to reflect the following correction: An article last Sunday about John C. Bogle, founder of the Vanguard Group, misidentified the Fidelity Investments executive whom Forbes magazine has listed as having personal wealth of $5.8 billion. He is Edward C. Johnson 3rd, not Edward C. Johnson 2nd, who led Fidelity for nearly 30 years and died in 1984. The article also misstated Edward C. Johnson 3rd's roles at the company. He remains chairman and chief executive; he did not give up the chairman's post last year.

mutual fund company founded by John C. Bogle, has become a colossus. Its index funds -- once derided for not even trying to beat the market -- are now the industry standard.And after at least six heart attacks and one heart transplant, Mr. Bogle has managed to witness this triumph. ''It's all a kind of a miracle,'' he says in a booming baritone. ''It's really nice that I'm able to see this happen in my own lifetime.''">